Coronavirus has already chopped 30% off the Dow Jones since February, but a new bill in Congress threatens to cause yet another massive drop in the U.S. stock market.
Proposed by Democrat Representative Maxine Waters, the House Financial Services Committee is currently considering the Pandemic Risk Insurance Act. It would force insurance firms to compensate companies for the business they’ve lost during the coronavirus pandemic.
While businesses are calling for additional financial support, the bill could cause a stock market meltdown. It would present the insurance industry with huge costs, which could force insurers to have a massive “fire-sale” of stocks. In turn, the Dow Jones and broader stock market would plummet yet again.
Amid all the hubbub surrounding Congress’ historic stimulus package, Californian Democratic Maxine Waters proposed a bill that has so far flown under the radar.
Dubbed the Pandemic Risk Insurance Act, Waters summarized its terms in a press release on March 18 :
This provision would create a reinsurance program similar to the Terrorism Risk Insurance act for pandemics, by capping the total insurance losses that insurance companies would face.
The bill would require insurers to provide protection against lost and interrupted business due to the coronavirus pandemic. It would cap the total amount insurers would have to pay out. Nonetheless, they’d still have to pay large sums, which could endanger the U.S. stock market.
For instance, with the Terrorism Risk Insurance Act, the total amount insurers have to pay out against a terrorist act is capped at $100 billion per year .
For every $100 billion, they have to pay out 20% of their direct earned premiums as a deductible. They then have to pay 20% of the remaining amount in excess of this deductible. The government will then pay the rest.
It’s not clear what the limits would be for the Pandemic Risk Insurance Act, but they would likely have to be larger to meet the scale of the coming coronavirus depression.
For the sake of comparison, the 9/11 terrorist attacks resulted in insured losses of $32.5 billion . By contrast, the U.S. marketing industry alone will lose around $26 billion as a result of the coronavirus. Some investors predict that U.S. corporations will lose $4 trillion overall .
Even with a cap and government assistance, the Pandemic Risk Insurance Act will confront insurers with enormous additional expenses.
According to analysts, one of the ways insurance companies will meet such expenses would be with a massive selloff of stocks.
Bruce Hepburn, the CEO of insurance and risk analysts Mactavish, told The Financial Times that insurers could end up having a “fire-sale” of stocks if enough isn’t done to support them:
In recent years, insurers have increased their riskier asset classes, in addition to their traditional investments in low risk corporate and sovereign bonds, many of which are increasingly returning low yields.
Hepburn added that the,
overall impact of coronavirus on the insurance sector could be more devastating than 9/11.
Many of the biggest insurance companies in America happen to be major investors in the U.S. stock market. Berkshire Hathaway, for example, is one of these companies . It currently has a stock portfolio worth around $166 billion .
If it and other insurance firms were forced into a major selloff of shares, the impact would be huge. The stock market could witness a repeat of March 12, its worst day since 1987 .
So if a Pandemic Risk Insurance Act does come to pass, let’s hope it offers sufficient protections for insurance companies. Otherwise it will heap suffering upon suffering.